Medicare: Not Such a Budget-Buster Anymore

You’re looking at the biggest story involving the federal budget and a crucial one for the future of the American economy. Every year for the last six years in a row, the Congressional Budget Office has reduced its estimate for how much the federal government will need to spend on Medicare in coming years. The latest reduction came in a report from the budget office on Wednesday morning.

The changes are big. The difference between the current estimate for Medicare’s 2019 budget and the estimate for the 2019 budget four years ago is about $95 billion. That sum is greater than the government is expected to spend that year on unemployment insurance, welfare and Amtrak — combined. It’s equal to about one-fifth of the expected Pentagon budget in 2019. Widely discussed policy changes, like raising the estate tax, would generate just a tiny fraction of the budget savings relative to the recent changes in Medicare’s spending estimates.

In more concrete terms, the reduced estimates mean that the federal government’s long-term budget deficit is considerably less severe than commonly thought just a few years ago. The country still faces a projected deficit in future decades, thanks mostly to the retirement of the baby boomers and the high cost of medical care, but it is not likely to require the level of fiscal pain that many assumed several years ago.

The reduced estimates are also an indication of what’s happening in the overall health care system. Even as more people are getting access to health insurance, the costs of caring for individual patients is growing at a super-slow rate. That means that health care, which has eaten into salary gains for years and driven up debt and bankruptcies, may be starting to stabilize as a share of national spending.

The chart above highlights the changes. It compares Medicare spending estimates from the Congressional Budget Office since 2006. Every year, the C.B.O. puts out its best guess for what the country will spend on Medicare over the next 10 years. In 2019, the C.B.O. now estimates the United States will spend about $11,300 in 2014 dollars to care for each person in Medicare. That’s down from around $12,700 since 2010, the year the Affordable Care Act became law. Now multiply that number times the 62.5 million people who will be in the Medicare program.

Although the C.B.O.'s forecasters have been off in their projections in the past, there is no reason to assume their estimates are too low now; their prior estimates have both overshot and undershot the real eventual spending numbers. For the last few years, health spending has slowed in such a significant and consistent way that the surprised forecasters can barely keep up.

Some of the recent reductions in Medicare spending are because of differences in estimates about the economy and demographics that affect the program.

And some are because of cuts in health care spending passed by Congress. The Affordable Care Act, in particular, made significant reductions to Medicare’s spending on hospitals and private Medicare plans, to help subsidize insurance coverage for low- and middle-income Americans. The Budget Control Act, which Congress passed in 2011, also made some across-the-board cuts to Medicare spending.

But much of the recent reductions come from changes in behavior among doctors, nurses, hospitals and patients. Medicare beneficiaries are using fewer high-cost health care services than in the past — taking fewer brand-name drugs, for example, or spending less time in the hospital. The C.B.O.'s economists call these changes “technical changes,” and they dominate the downward revisions since 2010.

In all, technical changes have been responsible for a 12 percent reduction since 2010 in the estimates for Medicare spending over the decade ending in 2020. In dollar terms, that’s over $700 billion, which is more than budget cutters could save by eliminating the tax deduction for charitable giving or by converting Medicaid into a block-grant program or cutting military spending by 15 percent.

How long this all will last is a source of great debate in the world of health economics. There have been aseriesofanalyses on the spending slowdown, some of which peg the Great Recession as a major cause. If those studies are right, the trend may reverse itself as the economy improves.

But the analysts at the Congressional Budget Office say the economy is playing a negligible role in what’s happening in Medicare, meaning that they’re more confident that the practice of medicine really is changing. And those changes, if they persist, will do more to reduce the federal deficit than nearly any policy option budget cutters talk about.

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